Annuities-when and why?

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karpems
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Annuities-when and why?

Post by karpems » Sun Jul 19, 2015 9:44 pm

I have been reading about annuities and I am still having trouble trying to figure out the proper use of them in a portfolio. Does anyone own any? If so, why?

We have maxed our 403/457 and HSA. Should we consider investing in an annuity? I know fidelity has some low expense ratio funds available in annuities.

Dude2
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Re: Annuities-when and why?

Post by Dude2 » Sun Jul 19, 2015 9:51 pm

My parents have annuities to take the burden of financial planning off of their plate and guarantee them an income in retirement.

Beyond that, Vanguard has some additional information concerning saving for retirement using a tax-deferred (variable or fixed) annuity.

https://investor.vanguard.com/annuity/deferred

I believe that most people around here use taxable accounts to invest their money after they have exhausted their tax-deferred spaces and have no interest in tax-deferred annuities -- probably due to the "you don't get something for nothing" principle, i.e. to control expenses, control investments, have more flexibility.

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Re: Annuities-when and why?

Post by rca1824 » Sun Jul 19, 2015 10:34 pm

It looks like you can get better yields on annuities than bonds, and indexed annuities than TIPS. My ideal retirement portfolio will be stocks + indexed annuities.
Monthly or yearly movements of stocks are often erratic and not indicative of changes in intrinsic value. Over time, however, stock prices and intrinsic value almost invariably converge. ~ WB

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Re: Annuities-when and why?

Post by gwrvmd » Sun Jul 19, 2015 10:37 pm

IMO there are 2 basic points to be made about annuities:

1) They are insurance products not investment products. If bought they should be bought at retirement not before. They can be part of a retirement portfolio not an investment portfolio

2) There are basically 2 types of annuities that make financial sense. A SPIA (Single Premium Immediate Annuity). It is a simple product priced competitively: You pay the insurance company a lump sum and they pay you a monthly payment for the rest of your life. You buy yourself a pension.
The second is a Deferred Fixed Annuity. You pay the insurance company a lump sum and they begin paying you a monthly sum some time in the future, usually 10 years. The monthly payments will be much higher than the SPIA because the payments don't begin for 10 years. You buy yourself a bigger pension that begins in 10 years that lasts for the rest of your life.

Annuities are not investment products. Their value is they allow you to be more aggressive in your retirement portfolio if you know you have some more guaranteed income besides SS and hopefully a pension.......Gordon
Disciple of John Neff

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Whiggish Boffin
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Re: Annuities-when and why?

Post by Whiggish Boffin » Sun Jul 19, 2015 10:54 pm

There are many insurance-company products called "annuities" and most of them are awful. The Bogleheads generally approve of one kind, or maybe two: SPIA and Longevity Insurance.

The SPIA -- Single-Premium Immediate Annuity -- has you pay a huge chunk of money to the insurance company. That's the single premium. Once you pay it, it's gone. Then, the insurance company pays you a monthly check for the rest of your life, which could be three months or 37 years. Usually the check is a constant-dollar amount, but you can get SPIAs that increase the payment to match the CPI inflation rate. Couples can buy joint-and-survivor SPIAs that keep making payments until the last spouse dies.

The SPIA has to be an insurance deal. It insures against dying broke. The insurance company makes the actuarial calculation, of how many buyers will survive to what date. They set the payout so that the people who die early kick in enough to cover the people who don't. The company spreads the risk from the short- to the long-lived.

Some Bogleheads like Longevity Insurance, which is a Single-Premium Deferred Annuity. With it, you pay the premium and don't start getting payments for years thereafter -- you buy at age 65, and start gettting payments at 80, for instance. Since you could well die before then, the premium is lower. You keep control of more of your money, but who knows what inflation will do to those payments while you wait.

Bogleheads generally regard the other forty-seven kinds of annuitites -- fixed, variable, indexed, universal, this week's flavor -- as high-cost complexifications, designed to hide high fees in confusing language for not much benefit to the buyer.

I intend to buy a CPI-adjusted SPIA between age 75 and 80, and then receive two inflation-adjusted monthly checks (Social Security and SPIA) for as long as I live. They will cover living expenses, but no luxuries. My stock/bond portfolio will pay for toys, treats, and trips, and if the market tanks, I'll just do without.

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Re: Annuities-when and why?

Post by littlebird » Sun Jul 19, 2015 11:10 pm

Because of my age and work history I had very little tax-deferred space. And I wanted more. I started investing in a Vanguard Variable Annuity ( functionally almost indistinguishable from a regular Vanguard mutual fund account) when I was 58 1/2, so that if I were to change my mind and want out, there'd be no tax penalty by the next year. Vanguard itself, unlike many annuity sellers, charges no penalty for premature withdrawal. I keep it mainly in bonds and occasionally, when the opportunity arises , I use it to "over re-balance" into stocks so that I can later sell them w/o a tax penalty.

If spouse or I should need l.t care, or need to move back to a HCOL area, I'll annuitize it. Yes, the ER is higher than regular Vanguard funds, but the compounding effect of not having paid tax on 15 years of bond interest, together with having the flexibility of a reasonable amount of tax-deferred space has made it worthwhile to me. There's also the serendipitous part where the 15 year old interest rate (4.1%) is locked in if and when I do annuitize it. If I were to do so at my present age I would get 8% for the rest of my life. If the interest rates should go up and Vanguard doesn't raise their's, I always have the opportunity to 1035 (1031?) it. All in all, a pretty happy old camper.

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Re: Annuities-when and why?

Post by sschullo » Sun Jul 19, 2015 11:13 pm

gwrvmd wrote:IMO there are 2 basic points to be made about annuities:

1) They are insurance products not investment products. If bought they should be bought at retirement not before. They can be part of a retirement portfolio not an investment portfolio

2) There are basically 2 types of annuities that make financial sense. A SPIA (Single Premium Immediate Annuity). It is a simple product priced competitively: You pay the insurance company a lump sum and they pay you a monthly payment for the rest of your life. You buy yourself a pension.
The second is a Deferred Fixed Annuity. You pay the insurance company a lump sum and they begin paying you a monthly sum some time in the future, usually 10 years. The monthly payments will be much higher than the SPIA because the payments don't begin for 10 years. You buy yourself a bigger pension that begins in 10 years that lasts for the rest of your life.

Annuities are not investment products. Their value is they allow you to be more aggressive in your retirement portfolio if you know you have some more guaranteed income besides SS and hopefully a pension.......Gordon


Excellent points!
Public School K-12 Educators: "Ask NOT what your annuity sales person can do for you, ask what you can do to be a Do-It-Yourselfer (DIY)."

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Re: Annuities-when and why?

Post by rrppve » Sun Jul 19, 2015 11:40 pm

I don't think annuities make sense for someone like you in accumulation. Just because you'be maxed out tax-deferred doesn't mean you should pay for the privilege of more tax deferred through an annuity. Invest in after-tax, and put your international equities there first and if you need to also your domestic equities.
My objection to annuities in accumulation are 1) they convert capital gains into ordinary income for taxes and 2) they always have extra fees and decreased flexibility.

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Re: Annuities-when and why?

Post by HomerJ » Mon Jul 20, 2015 12:11 am

rca1824 wrote:It looks like you can get better yields on annuities than bonds, and indexed annuities than TIPS.


Yes, it "looks like"... Insurance companies do a great job making sure it "looks like" you can get better yields....

But you don't... It's all a lie... Frankly I think it should be illegal to sell "guaranteed" gains that are not real.

The only good annuity is a SPIA...

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Re: Annuities-when and why?

Post by itstoomuch » Mon Jul 20, 2015 12:13 am

We (65/68) have GWLB Variables. Purchased for 1) Insurance (market and death); 2) Investment; 3) Income.
We have GWLB Fixed Index. Purchased for 1)Insurance (market and death); 2) Income 3) Investment.
Both types are laddered by time and amounts.
The annuities are the "Bad" type. At the time, I didn't like Vanguard's or Fidelity's annuities.
The annuities were purchased, with withdrawal rights, 2008-2012. More recent annuities are not as generous as our purchases.

We have Index MFs which are just there. Maybe for long range speculation? I don't track.
We have trading accounts. Which are short-term, highly speculative in comparison to the annuities and MF.
We have No bonds. No CDs. I was disappointed in our W funds in 2008.
We expect to use the annuities as longevity and as a partially, inflation protected pension.
Annuities have achieved the Income Number, along with early SS and small pension.
We have LTCi.

I expect to withdraw, maybe 10-20% of the annuities to create laddered SPIA.
I don't particularly like SPIAs because you give away too much.
I do not expect to annuitize the GWLB annuities. We expect to leave a remainder to the Only.
I spent months in investigating annuities. Saw dozens of presentations. Never once was I offered a free lunch. I was not solicited but saw a way to take a measured long futures option.

YMMV.
Currently toying with the idea of doing Options to protect some of the speculative stock.
Also have a portfolio of dividend paying Utility stocks.

GL. :annoyed
Rev90517; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax 25%. Early SS. FundRatio (FR) >1.1 67/70yo

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HomerJ
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Re: Annuities-when and why?

Post by HomerJ » Mon Jul 20, 2015 12:15 am

Whiggish Boffin wrote:There are many insurance-company products called "annuities" and most of them are awful. The Bogleheads generally approve of one kind, or maybe two: SPIA and Longevity Insurance.

The SPIA -- Single-Premium Immediate Annuity -- has you pay a huge chunk of money to the insurance company. That's the single premium. Once you pay it, it's gone. Then, the insurance company pays you a monthly check for the rest of your life, which could be three months or 37 years. Usually the check is a constant-dollar amount, but you can get SPIAs that increase the payment to match the CPI inflation rate. Couples can buy joint-and-survivor SPIAs that keep making payments until the last spouse dies.

The SPIA has to be an insurance deal. It insures against dying broke. The insurance company makes the actuarial calculation, of how many buyers will survive to what date. They set the payout so that the people who die early kick in enough to cover the people who don't. The company spreads the risk from the short- to the long-lived.

Some Bogleheads like Longevity Insurance, which is a Single-Premium Deferred Annuity. With it, you pay the premium and don't start getting payments for years thereafter -- you buy at age 65, and start gettting payments at 80, for instance. Since you could well die before then, the premium is lower. You keep control of more of your money, but who knows what inflation will do to those payments while you wait.

Bogleheads generally regard the other forty-seven kinds of annuitites -- fixed, variable, indexed, universal, this week's flavor -- as high-cost complexifications, designed to hide high fees in confusing language for not much benefit to the buyer.


Great post.

I intend to buy a CPI-adjusted SPIA between age 75 and 80, and then receive two inflation-adjusted monthly checks (Social Security and SPIA) for as long as I live. They will cover living expenses, but no luxuries. My stock/bond portfolio will pay for toys, treats, and trips, and if the market tanks, I'll just do without.


Yes, I probably will do the same, although I'll probably buy a SPIA around 65-70. But I do like the idea of creating my own pension that covers basic needs for as long as I live... Fun stuff will come from the rest of my portfolio.

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Re: Annuities-when and why?

Post by SGM » Mon Jul 20, 2015 4:46 am

If I annuitize it will be laddered SPIAs purchased from a taxable account beginning at 70.

DW has a TIAA-CREF retirement plan. She and her former employer contributed to it for 4 years. It has since grown for 30 years, doubling every 7.2 years. It can be annuitized tomorrow and would give her a nice income stream. Initially it was 50/50 TIAA and CREF and is now close to 100% CREF. From what I have read at Morningstar most T-C annuitants are happy with their plans.

I decided not to get a variable annuity from Vanguard or Fidelity because it adds a layer of fees to mutual fund investments and that would be a drag on returns.

I have a 7 year flexible deferred savings annuity that started out paying 4%. New deposits and tax deferred interest payments get averaged in so the effective rate for 2015 is 3.68%. I have made no new deposits since early during the second year. I could have take out 10% per year without penalty after year 1 and either take it all out in two years or annuitize it at any time. For me it was a safe place to get a little better return for cash than a comparable CD.

karpems
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Re: Annuities-when and why?

Post by karpems » Mon Jul 20, 2015 6:10 am

thanks everyone!

rca1824
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Re: Annuities-when and why?

Post by rca1824 » Mon Jul 20, 2015 7:40 am

HomerJ wrote:
rca1824 wrote:It looks like you can get better yields on annuities than bonds, and indexed annuities than TIPS.


Yes, it "looks like"... Insurance companies do a great job making sure it "looks like" you can get better yields....

But you don't... It's all a lie... Frankly I think it should be illegal to sell "guaranteed" gains that are not real.

The only good annuity is a SPIA...


Can you elaborate why it's a lie? If a SPIA pays 6.3% per year on the initial premium, I see myself getting $6.3 cash each year for each $100 I put up. Insurance companies (at least mine) is AAA rated, and its policies are insured by the govt like FDIC. That's better than I can get on bonds. Only junk bonds pay that much. The reason is because people who die early subsidize those who live longer, which gives you a higher steady income stream. To hedge against inflation risk, one can get an indexed annuity, where rates are lower ~ 3-3.5% right now I believe but that is still better than a TIPS where 30y yield is 1.12%.
Monthly or yearly movements of stocks are often erratic and not indicative of changes in intrinsic value. Over time, however, stock prices and intrinsic value almost invariably converge. ~ WB

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Re: Annuities-when and why?

Post by goingup » Mon Jul 20, 2015 8:03 am

rrppve wrote:I don't think annuities make sense for someone like you in accumulation. Just because you'be maxed out tax-deferred doesn't mean you should pay for the privilege of more tax deferred through an annuity. Invest in after-tax, and put your international equities there first and if you need to also your domestic equities.
My objection to annuities in accumulation are 1) they convert capital gains into ordinary income for taxes and 2) they always have extra fees and decreased flexibility.

This has been my thinking, too. Set up your taxable account with tax-efficient funds. Annuities have there role but not during the accumulation years.

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Re: Annuities-when and why?

Post by dbr » Mon Jul 20, 2015 8:03 am

rca1824 wrote:
HomerJ wrote:
rca1824 wrote:It looks like you can get better yields on annuities than bonds, and indexed annuities than TIPS.


Yes, it "looks like"... Insurance companies do a great job making sure it "looks like" you can get better yields....

But you don't... It's all a lie... Frankly I think it should be illegal to sell "guaranteed" gains that are not real.

The only good annuity is a SPIA...


Can you elaborate why it's a lie? If a SPIA pays 6.3% per year on the initial premium, I see myself getting $6.3 cash each year for each $100 I put up. Insurance companies (at least mine) is AAA rated, and its policies are insured by the govt like FDIC. That's better than I can get on bonds. Only junk bonds pay that much. The reason is because people who die early subsidize those who live longer, which gives you a higher steady income stream. To hedge against inflation risk, one can get an indexed annuity, where rates are lower ~ 3-3.5% right now I believe but that is still better than a TIPS where 30y yield is 1.12%.


He/they said SPIAs are not a lie and all the other annuities are a lie. Admittedly the phrasing is not clear on that. Your uexplanation of the SPIA is to the point. One quibble I would have is that by indexed you mean an "inflation indexed" annuity and not that "equity indexed annuity," which is an entirely different and not recommended game to play. Whenever the word annuity is mentioned a great deal of caution is required to be specific as to exactly what is going on. It doesn't help that the IRS itself calls a whole bunch of retirement plans, such as 403's "annuities" even though they may contain no such thing or they may.

As far as the present thread, it is rare but possible that an investor may benefit from using a deferred variable annuity or similar for tax reasons. The key there is to set up the annuity somewhere such that fees and costs are transparent and minimal.

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Re: Annuities-when and why?

Post by skepticalobserver » Mon Jul 20, 2015 8:26 am

Stay far away from equity indexed annuities. The ones I’ve examined are bait and switch. The promise of market like returns with no loses is illusory—the crediting formulas are gamed to generate bupkis. That leaves the so-called “income” aspect of this product which underperforms otherwise commercially available SPIAs. The “hybrid” annuity pitch that the annuitant “protects” (not to be confused with “preserves”) the contract value for a cash out or inheritance is bogus too—draconian early withdrawal penalties (some up to 16 years), income payouts and various fees destroy what’s left of the contract cash value.

The radio talk show carnies that sell the stuff are quite entertaining, however.

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HomerJ
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Re: Annuities-when and why?

Post by HomerJ » Mon Jul 20, 2015 8:57 am

rca1824 wrote:
HomerJ wrote:
rca1824 wrote:It looks like you can get better yields on annuities than bonds, and indexed annuities than TIPS.


Yes, it "looks like"... Insurance companies do a great job making sure it "looks like" you can get better yields....

But you don't... It's all a lie... Frankly I think it should be illegal to sell "guaranteed" gains that are not real.

The only good annuity is a SPIA...


Can you elaborate why it's a lie? If a SPIA pays 6.3% per year on the initial premium, I see myself getting $6.3 cash each year for each $100 I put up. Insurance companies (at least mine) is AAA rated, and its policies are insured by the govt like FDIC. That's better than I can get on bonds. Only junk bonds pay that much. The reason is because people who die early subsidize those who live longer, which gives you a higher steady income stream. To hedge against inflation risk, one can get an indexed annuity, where rates are lower ~ 3-3.5% right now I believe but that is still better than a TIPS where 30y yield is 1.12%.


SPIAs are the good annuities, no lie there... You give them $100,000 and they give you $6300 each year for the rest of your life (to use your example). You're not really getting a 6.3% return though.. The $100,000 is gone, and they are giving you part of your principle back each year...

You'd probably do just as well with $100,000 in a bond fund, where you pulled 6.3% out each year... unless you lived a really long time.... You'd probably run out of money after 25 years. SPIAs are longevity insurance... Peace of mind knowing that they pay out as long as you live. But the trade-off is if you die in 15 years, the $100,000 is gone using a SPIA... but if you were doing the bond fund method, there probably would be a good chunk of money left over for your heirs.

Me, I'll be using SOME of money to buy the SPIA, and get the annual payments for life...
Last edited by HomerJ on Mon Jul 20, 2015 9:05 am, edited 1 time in total.

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HomerJ
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Re: Annuities-when and why?

Post by HomerJ » Mon Jul 20, 2015 9:04 am

rca1824 wrote:To hedge against inflation risk, one can get an indexed annuity, where rates are lower ~ 3-3.5% right now I believe but that is still better than a TIPS where 30y yield is 1.12%.


The lie with indexed annuities is this... That "guaranteed" rate of 3%-3.5% is meaningless. You'll give them $100,000, and the "accumulated value" will grow 3.5% on your statements... But that's not "cash value". You don't get to withdraw that amount later on.

Instead, you will be able to convert that "accumulated value" into an annuity... but the insurance company will pay less than market rates.

Say you invest $100,000 and at 3.5% it grows to $167,000 in 15 years... Then you annuitize it, and they pay you 7% annuity on that $167,000 which is a nice $11,700 a year... But the market rates for SPIAs might be paying 9% for your age in 15 years.

To generate $11,700 a year with a 9% SPIA, you'd only need $130,000... so even though your indexed annuity grew to $167,000 on paper, you're really only getting $130,000 of value from it... So instead of the "guaranteed 3.5%", you really only got a 1.8% return on your money.

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Re: Annuities-when and why?

Post by ResearchMed » Mon Jul 20, 2015 9:13 am

HomerJ wrote:
rca1824 wrote:
HomerJ wrote:
rca1824 wrote:It looks like you can get better yields on annuities than bonds, and indexed annuities than TIPS.


Yes, it "looks like"... Insurance companies do a great job making sure it "looks like" you can get better yields....

But you don't... It's all a lie... Frankly I think it should be illegal to sell "guaranteed" gains that are not real.

The only good annuity is a SPIA...


Can you elaborate why it's a lie? If a SPIA pays 6.3% per year on the initial premium, I see myself getting $6.3 cash each year for each $100 I put up. Insurance companies (at least mine) is AAA rated, and its policies are insured by the govt like FDIC. That's better than I can get on bonds. Only junk bonds pay that much. The reason is because people who die early subsidize those who live longer, which gives you a higher steady income stream. To hedge against inflation risk, one can get an indexed annuity, where rates are lower ~ 3-3.5% right now I believe but that is still better than a TIPS where 30y yield is 1.12%.


SPIAs are the good annuities, no lie there... You give them $100,000 and they give you $6300 each year for the rest of your life (to use your example). You're not really getting a 6.3% return though.. The $100,000 is gone, and they are giving you part of your principle back each year...

You'd probably do just as well with $100,000 in a bond fund, where you pulled 6.3% out each year... unless you lived a really long time.... You'd probably run out of money after 25-30 years. SPIAs are longevity insurance... Peace of mind knowing that they pay out as long as you live. But the trade-off is if you die in 15 years, the $100,000 is gone using a SPIA... but if you were doing the bond fund method, there probably would be a good chunk of money left over for your heirs.

Me, I'll be using SOME of money to buy the SPIA, and get the annual payments for life...


To emphasize something HomerJ just wrote, about using *SOME* of the money to buy an SPIA...

This is very important, even for those who strongly wish to have some SPIAs (also for Single Payment Deferred Annuities, the other "approved" - by most - flavor).

Because these payments are typically non-refundable (and if you "might" want the money back, then these annuities are not for you), there is no longer any lump sum available for unexpected big ticket items (such as medical/nursing help).

So it is important to keep at least some of your money "accessible" for any "just in case" scenarios.

We'll be doing what is described above, annuitizing some (to add lifetime income to the Social Security), and keep another pot for the "extras" such as travel, or another car, etc.
That extra "fun pot" will also serve for any unexpected emergencies, or semi-expected urgent needs, like long term care.
(We have some insurance for this, but expect we might want an assisted living facility eventually, or a continuing care community, and long term care insurance wouldn't pay for all of those expenses. The deferred annuity will likely be used for this type of expense, too, as will annual expenditures that were previously used for significant travel while healthier.)

RM
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Re: Annuities-when and why?

Post by rca1824 » Mon Jul 20, 2015 9:26 am

HomerJ wrote:
rca1824 wrote:To hedge against inflation risk, one can get an indexed annuity, where rates are lower ~ 3-3.5% right now I believe but that is still better than a TIPS where 30y yield is 1.12%.


The lie with indexed annuities is this... That "guaranteed" rate of 3%-3.5% is meaningless. You'll give them $100,000, and the "accumulated value" will grow 3.5% on your statements... But that's not "cash value". You don't get to withdraw that amount later on.

Instead, you will be able to convert that "accumulated value" into an annuity... but the insurance company will pay less than market rates.

Say you invest $100,000 and at 3.5% it grows to $167,000 in 15 years... Then you annuitize it, and they pay you 7% annuity on that $167,000 which is a nice $11,700 a year... But the market rates for SPIAs might be paying 9% for your age in 15 years.

To generate $11,700 a year with a 9% SPIA, you'd only need $130,000... so even though your indexed annuity grew to $167,000 on paper, you're really only getting $130,000 of value from it... So instead of the "guaranteed 3.5%", you really only got a 1.8% return on your money.


That's not the annuity I'm describing. That describes like a deferred annuity. The annuity I am describing is one that immediately pays 3.5% on your capital, indexed to inflation. So if you put up $100k you will get $3500 a year every year until you die indexed to inflation.


HomerJ wrote:SPIAs are the good annuities, no lie there... You give them $100,000 and they give you $6300 each year for the rest of your life (to use your example). You're not really getting a 6.3% return though.. The $100,000 is gone, and they are giving you part of your principle back each year...

You'd probably do just as well with $100,000 in a bond fund, where you pulled 6.3% out each year... unless you lived a really long time.... You'd probably run out of money after 25 years. SPIAs are longevity insurance... Peace of mind knowing that they pay out as long as you live. But the trade-off is if you die in 15 years, the $100,000 is gone using a SPIA... but if you were doing the bond fund method, there probably would be a good chunk of money left over for your heirs.

Me, I'll be using SOME of money to buy the SPIA, and get the annual payments for life...


I get that they are longevity insurance but the purpose of retirement planning is plan for that risk so I still see them having a role in one's portfolio. If you invested in bonds, you would never be able to get a 6.3% annual income unless you tap into principle, and then the principle runs a risk of being depleted. For example if bond yields are 3% you would have have to sell 3.3% of your capital each year. Then as you sell the capital, your dividend income decreases further, causing you to liquidate more. Eventually your capital goes to 0. If this happens before you die you are broke. The goal of retirement planning is to go to 0 right when you die - no sooner or later. That is exactly what annuities do. They give you the maximum sustainable fixed income per capital. That's why I would rather have a portfolio of stocks + annuities than stocks + bonds.
Monthly or yearly movements of stocks are often erratic and not indicative of changes in intrinsic value. Over time, however, stock prices and intrinsic value almost invariably converge. ~ WB

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Re: Annuities-when and why?

Post by itstoomuch » Mon Jul 20, 2015 10:15 am

@ Karpems
How old are you?

I would not BUY an annuity of any type, if you are under 55 and not within a minimum of 10 years of retirement. The fees of just too high.
If you are less than 55, Taxable accounts are very good and offer considerable tax considerations in both UP and Down markets that tax deferred retirement accounts do not offer.

YMMV
Rev90517; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax 25%. Early SS. FundRatio (FR) >1.1 67/70yo

Ron
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Re: Annuities-when and why?

Post by Ron » Mon Jul 20, 2015 10:29 am

karpems wrote:I have been reading about annuities and I am still having trouble trying to figure out the proper use of them in a portfolio. Does anyone own any? If so, why?

In answer to your questions "when", it was at my retirement at age 59 in early 2007 ("working" on my 9th year of retirement 8-) )...

"Why" was for a number of reasons.

To begin with, the company I retired from eliminated their defined benefit (e.g. pension) plan in the early 80's and replaced it with a 401(k) plan. Anybody who had pension credits (under ERISA) received a lump sum settlement to do with as they wished. Since I was only with the company a few years at the time, and my settlement was only for a couple of $k, I rolled it over into my TIRA the year I received it.

Later, the company increased its retirement plan beyond just the 401(k) and provided a http://www.investopedia.com/terms/c/cas ... onplan.asp with the proceeds either given as a lump sum or an annuity (e.g. SPIA) provided by a third party.

A few weeks before my retirement, I received a cash balance plan settlement letter which provided me the options available to me. The lump sum amount was also accompanied to what my benefit would be under the company's vendor annuity. The terms of the (SPIA) annuity was joint life, with no specified term and a reduction in payments to the survivor (my wife) assuming I died first.

I took the terms of the annuity and I started looking for a better product to suit my needs, using quotes obtained from Vanguard, Fidelity, and through https://www.immediateannuities.com/ ...

What I/we (my wife was part of the decision process) was an SPIA that was for a calculated 100% joint life term, which at the time was considered 28 years (wife/me are the same age, within a few months of each other). That meant that payments would continue until at least age 87. If either died before that age, payments would continue at 100% (no reduction). If one/both lived past the age of 87, payments would continue until both had passed. And if we both died before age 87? Payments would continue to be made (at 100%) to our estate.

As to the "return" (as has been discussed by others on this thread), the calculation should not include any return of premium in the monthly payment received. Using the Excel IRR function (not XIRR) showing the initial premium paid and the monthly payment for 28 years returns a value of 4.79%. If for some reason either/both of us live beyond the age of 87, that calculated term would actually increase. A situation that may be unlikely, but still recognized as fact.

Back in 2007, the one thing that worried me (same as today, for most folks) was how inflation would come into play and how it would affect the true value of the payments we would be receiving. Little did I know is that inflation today would be much less and the impact to those payments would be nothing at all. Sometimes dumb luck takes care of your fears.

At the time of the purchase of the SPIA, it represented 10% of our retirement portfolio value. The actual cash balance settlement I received from my former company was for more than the premium paid, and the remainder was put into the market.

The SPIA has turned out well in our case. In fact, we made the decision to delay SS until age 70 (less than 2.5 years away for me) to maximize our monthly payment, in addition to have a much higher SS benefit for my wife, assuming I die first.

The delay of SS means that we will be doing a draw down of our TIRA funds (we're "bleeding edge boomers", when Roth 401(k)'s were not around, also including limited access to Roth IRA's) which will help reduce the amount of excess RMD's at age 70.5 starting in 2018 for both of us.

Additionally, the purchase of the SPIA removes the amount of the premium from RMD consideration since a life annuity is considered to remove the retirement funds from RMD consideration.

As far as the "cost" of the SPIA as compared to the third party offering (with much less reduced "options" - or "insurance on insurance" as I like to say), about $20/month in reduced benefits when compared to the "plain vanilla" plan from my former employer.

As to your comment "use them in a portfolio", an annuity (specifically an SPIA) is not an investment product - it is an income product/stream. While it may lead you to take more risk with your retirement investment portfolio (since you are receiving a consistent income stream), it is insurance and has no possibility of increase in value. OTOH, it won't loose value (except possibility of excess inflation) like a portfolio might.

Anyway, that's my long answer to your short question :mrgreen: ...

Just to prove that you may want to consider an SPIA before your 80's (as most folks comment) if you have a reason to do so.

- Ron

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HomerJ
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Re: Annuities-when and why?

Post by HomerJ » Mon Jul 20, 2015 10:39 am

rca1824 wrote:That's not the annuity I'm describing. That describes like a deferred annuity. The annuity I am describing is one that immediately pays 3.5% on your capital, indexed to inflation. So if you put up $100k you will get $3500 a year every year until you die indexed to inflation.


You are describing a SPIA that has an inflation adjustment. That's a good annuity..

An "indexed annuity" is a bad annuity that claims to give a guaranteed base amount, while still providing upside from the stock market, because it is also tagged somehow partially to a stock market index.

I get that they are longevity insurance but the purpose of retirement planning is plan for that risk so I still see them having a role in one's portfolio.


Oh I agree.

If you invested in bonds, you would never be able to get a 6.3% annual income unless you tap into principle, and then the principle runs a risk of being depleted.


Well, sure... that's what I said as well... But buying a SPIA ensures that the principle is depleted. First day, it's all gone... But that's okay. Because at least you don't have to worry about the income stream drying up.

For example if bond yields are 3% you would have have to sell 3.3% of your capital each year. Then as you sell the capital, your dividend income decreases further, causing you to liquidate more. Eventually your capital goes to 0. If this happens before you die you are broke. The goal of retirement planning is to go to 0 right when you die - no sooner or later. That is exactly what annuities do. They give you the maximum sustainable fixed income per capital. That's why I would rather have a portfolio of stocks + annuities than stocks + bonds.
[/quote]

Yep, that's a good reason to own a SPIA... I will probably own a SPIA, bonds, AND stocks.

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Re: Annuities-when and why?

Post by rca1824 » Mon Jul 20, 2015 10:56 am

HomerJ wrote:Yep, that's a good reason to own a SPIA... I will probably own a SPIA, bonds, AND stocks.



I will have to crunch the numbers but is it better to own bonds so you can rebalance into equities when they dip? I haven't found a single 30-year period in history where a combination of stocks and intermediate treasuries outperformed stocks alone. So if you are just holding equities so they can get added to your estate and for occasional dividend income it seems it is better to hold 100% equities in addition to the annuity rather than stocks AND bonds. There could be an issue though with RMD bleeding a 100% equity portfolio during bear markets, but then I think you could just rebuy the equity in a brokerage account to workaround that issue, after paying taxes of course..
Monthly or yearly movements of stocks are often erratic and not indicative of changes in intrinsic value. Over time, however, stock prices and intrinsic value almost invariably converge. ~ WB

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Re: Annuities-when and why?

Post by dbr » Mon Jul 20, 2015 11:07 am

rca1824 wrote:
HomerJ wrote:Yep, that's a good reason to own a SPIA... I will probably own a SPIA, bonds, AND stocks.



I will have to crunch the numbers but is it better to own bonds so you can rebalance into equities when they dip? I haven't found a single 30-year period in history where a combination of stocks and intermediate treasuries outperformed stocks alone. So if you are just holding equities so they can get added to your estate and for occasional dividend income it seems it is better to hold 100% equities in addition to the annuity rather than stocks AND bonds. There could be an issue though with RMD bleeding a 100% equity portfolio during bear markets, but then I think you could just rebuy the equity in a brokerage account to workaround that issue, after paying taxes of course..


If you are just looking at return you are doing the retirement withdrawal problem incorrectly. When people do that problem correctly the finding is that withdrawal rate and luck of history are the dominant factors in the outcome. Asset allocation has a weak effect. At modest withdrawals, around 4% inflation indexed and 30 year time spans, too little in stocks is fatal. About 40% is a good amount. More in stocks is not helpful. 100% stocks is slightly disadvantageous. At higher withdrawal rates more and more in stocks is needed to maximize success, but the rate of success at high withdrawal rates is so low that the discussion is not practical. At low withdrawal rates asset allocation has no effect on outcome measured as not running out of money before dying. All allocations do not fail. What will happen with higher stock allocations is a much higher and greater spread of terminal wealth. It may also be that the rare failures that happen when one is higher in stock will be earlier and more drastic than with allocation to bonds. Wade Pfau has looked at the comparison between holding stocks and SPIAs rather than stocks and bonds and may have shown that stock/SPIA is a better strategy than stock/bond. It also appears to be true that spending down bonds first rather than stocks is a better strategy. None of this has anything to do with dividend investing other than that setting withdrawals equal to dividends will determine the withdrawal rate, rather give a sort of undefined withdrawal rate. It is also possible that there are factor features of a dividend stock portfolio that are of interest, but that remains to be clearly shown.

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Re: Annuities-when and why?

Post by friar1610 » Mon Jul 20, 2015 11:08 am

Here is my annuity story:

- Quite a few years ago I transferred a sum from a Fidelity MF into a Fidelity Variable Annuity. I did this because I erroneously thought that since I was not eligible to participate in a 401K or 403B at the time, I was missing out on the chance to have retirement funds grow tax-deferred. I was also unduly influenced by a Fidelity annuity rep.
- I subsequently transferred the annuity twice: once to TIAA-CREF and then to Vanguard where it sits now.
- It has grown nicely over the years and now represents about 15% of my total portfolio.
- It is currently invested in a 40/60 Life Strategy fund along with a small portion of Total Bond Index fund (technically, clones of the funds) such that the AA is 35/65. (I am interested in capital preservation more than growth at this point.)
- I do not need the income from the annuity so I have not annuitized it and have no immediate plans to do so.
- I am 70; my wife is almost 69.
- If I could walk that dog back knowing what I know now, I would not buy the annuity. However, it has not been a total disaster as all three firms with which I've had the annuity are low-cost, quality providers.

Here's where the annuity now fits into my plans:
- Assuming that I predecease my wife (and, actuarially speaking, I'm going to), she will inherit the annuity. At that time she can annuitize it to make up for the loss of income resulting from the loss of my pension. (She will get about about 30% of the pension due to a survivor benefit election I made when I retired.)
- If she predeceases me, I will take money out of the annuity and make a couple of significant charitable contributions that are currently written into my will. So even though the withdrawals will count as regular income for tax purposes, those amounts will be offset by the tax deductions for the charitable contributions. These will reduce the amount in the annuity by about 30%.
- I'm not sure what I would do with the remaining amount after the charitable contributions come out. I'm likely not to need the regular income so I'll probably just leave the money to my kids or grandkids. Or I may annuitize it on a single life plus 10 or 20 year year basis and let my kids or a charity receive the payments for the 10 or 20 year period after I'm gone. I'll cross that bridge if/when I find I (rather than my wife) am the last one standing.
- If I decide to annuitize it, I will do a round of due diligence to make sure I am not missing out on a better deal by transferring it to another company before annuitizing.

As noted above, I wouldn't do it again but it hasn't been a financial disaster.
Friar1610

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Re: Annuities-when and why?

Post by itstoomuch » Mon Jul 20, 2015 11:56 am

Re: What 2008/09 has done to me
Postby itstoomuch » Mon Jul 20, 2015 8:49 am

Flashes1 wrote:
Couple ways it affected me:

1. I see how one's money can all be taken away overnight. It made me realize that I needed to enjoy my money ----just don't save everything you make because it can disappear. We went out and bought an expansive house-----no one can take that away from me.

2. I work in large corporate lending for a top 10 bank-----I saw how close the financial system was to collapsing. We were a lot closer to a guns and canned food time than a lot of people on this board realize.



Summer 2008, I saw this in the eyes of older bro (advisory role, phd econ, NYFed, 25 yrs an executive at a TBTF entity). I kinda knew that USA was in trouble in 2007 but didn't understand the extent and depth of the problems. I tried to show Bro, how a mcmansion housing development near to us, was increasing $$$$ monthly and with many sold to immigrants with marginal english speaking skills. :confused


By Fall 2008, I determined that if the economy was going to tank, I'd might as well try to hedge the retirement accounts. Older Bro, told me 5 years earlier, than Big Bank did not like to hedge their loans (investments) thru options/swaps-because it cost too much. GoldmanSachs, thought differently.
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Re: Annuities-when and why?

Post by HomerJ » Mon Jul 20, 2015 12:27 pm

rca1824 wrote:
HomerJ wrote:Yep, that's a good reason to own a SPIA... I will probably own a SPIA, bonds, AND stocks.



I will have to crunch the numbers but is it better to own bonds so you can rebalance into equities when they dip? I haven't found a single 30-year period in history where a combination of stocks and intermediate treasuries outperformed stocks alone. So if you are just holding equities so they can get added to your estate and for occasional dividend income it seems it is better to hold 100% equities in addition to the annuity rather than stocks AND bonds. There could be an issue though with RMD bleeding a 100% equity portfolio during bear markets, but then I think you could just rebuy the equity in a brokerage account to workaround that issue, after paying taxes of course..


I don't want all my money in a SPIA because what if I need a large pool of money for something (for a medical expense, say.. or maybe my kids need help).

If I leave some money in investments, I wouldn't want to be 100% stocks, because the stock market might crash and stay down for a long period of time, and again, what if I need a large pool of money for something?

I will probably buy multiple small non-inflation-adjusted SPIAs as a ladder... My goal is to just cover my base expenses with SS and SPIA income. I will keep 50%-75% of money in stocks/bonds with most in bonds... I want the safety of bonds in retirement, so I don't have to worry about stock market crashes as much.

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Re: Annuities-when and why?

Post by bayview » Mon Jul 20, 2015 8:49 pm

rca1824 wrote:
HomerJ wrote:Yep, that's a good reason to own a SPIA... I will probably own a SPIA, bonds, AND stocks.

I will have to crunch the numbers but is it better to own bonds so you can rebalance into equities when they dip? I haven't found a single 30-year period in history where a combination of stocks and intermediate treasuries outperformed stocks alone. So if you are just holding equities so they can get added to your estate and for occasional dividend income it seems it is better to hold 100% equities in addition to the annuity rather than stocks AND bonds. There could be an issue though with RMD bleeding a 100% equity portfolio during bear markets, but then I think you could just rebuy the equity in a brokerage account to workaround that issue, after paying taxes of course..

If you are in the accumulation stage, it is very handy to have at least 10% in bonds (for the very aggressive) so that you can buy equities at a discount. I was able to buy a lot of stocks for cheap during 2008-09, although scared semi-witless in the process.

If you are in retirement (doesn't sound like you are), one thought is to go with assymetrical rebalancing: when stocks go up, sell some to get more fixed income, but if stocks go down, sit tight. Until you are on the verge of retirement, it's hard to understand the gut-clench you might feel when seeing expected income be reduced.

I would NEVER buy an annuity during the accumulation phase. (That is technically where I am now, although ~5-8 years from retirement.) I would never want to tie my money up that far ahead of when it's needed. We will probably look at SPIA's somewhere around age 70 once we have a clear understanding of our fixed and expected expenses. Before that, heck no.
The continuous execution of a sound strategy gives you the benefit of the strategy. That's what it's all about. --Rick Ferri

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Re: Annuities-when and why?

Post by rca1824 » Mon Jul 20, 2015 9:52 pm

bayview wrote:Until you are on the verge of retirement, it's hard to understand the gut-clench you might feel when seeing expected income be reduced.



But expected income doesn't decrease much when the price falls. Even if you were to buy into equities on Black Tuesday right before the market crashed, you would still receive about 80% of your expected dividend for the next decade. Dividends, averaged over an entire decade, tend to be incredibly smooth. If one has cash reserves to help smooth out withdrawals over that decade, then I don't see the big fear if equities fall in price.
Monthly or yearly movements of stocks are often erratic and not indicative of changes in intrinsic value. Over time, however, stock prices and intrinsic value almost invariably converge. ~ WB

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Re: Annuities-when and why?

Post by rakamaka » Mon Jul 20, 2015 10:03 pm

Annuities : NEVER
whatever way you slice and dice....you will come to realization of following during withdrawal period
--gains are taxed at ordinary rates (dont tell me your income will be low and hence lower tax bracket...why do you want to live poor?)
---taxation as LIFO (gains are come out first, principal later on)
---no step up basis for heirs, they pay full tax
---your death, joy for insurance company, they pocket remaining balance..

better alternative to annuity : accumulate money in something similar to Vanguard managed payout fund or Fidelity retirement income fund (in taxable account to get step up basis) ...then of course your friendly financial advisor won't be friend anymore

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Re: Annuities-when and why?

Post by bayview » Mon Jul 20, 2015 10:08 pm

rca1824 wrote:
bayview wrote:Until you are on the verge of retirement, it's hard to understand the gut-clench you might feel when seeing expected income be reduced.

But expected income doesn't decrease much when the price falls. Even if you were to buy into equities on Black Tuesday right before the market crashed, you would still receive about 80% of your expected dividend for the next decade. If one has cash reserves to help smooth out withdrawals over that decade, then I don't see the big fear if equities fall in price.

The bolded part says it all.

There are people who are now at retirement age who had everything, I mean EVERYTHING, in their retirement portfolios. They had no separate cash savings, in CD's or whatever, so they were at the mercy of the markets.

rca1824 wrote: If one has cash reserves to help smooth out withdrawals over that decade...

Another bolded part, and it dismisses those who poured all their spare change into retirement accounts, neglecting plain-Jane cash savings.

Again, when you are looking at things from age 30-40 or so, you can see the magic hand-waving effect, where everything works out in the end.But if you are relying on your dividends or whatever else that very month, and you are in the beginning of that bad decade, you are looking at a significant hit to your income. You have to try to understand that most American workers, including those who are quite intelligent and in relatively high-paying jobs, really don't/didn't know much about investment strategy. And IMO, that is completely understandable. Most of us spend our time and intellect on our daily job, not on what happens when it's all over. (Unfortunately.)

There are a ton of things that make sense in your accumulation stage (and I took advantage of many of them), and there are a completely separate ton of things that you have to do when you're pulling from your savings. IMO, this is a HUGE challenge for investors, and it's only recently been addressed.
The continuous execution of a sound strategy gives you the benefit of the strategy. That's what it's all about. --Rick Ferri

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Re: Annuities-when and why?

Post by rca1824 » Mon Jul 20, 2015 10:19 pm

I guess I just took it for granted the accumulators would hold 3-6 months cash emergency fund and retirees would hold 1-5 years cash emergency fund to smooth market returns. My ideal portfolio would be to have that cash reserve, perhaps some of it invested in CDs, plus a 100% equity portfolio. 100% equities outperforms bonds over the long run if never sold. I would then only withdraw dividends, and probably even reinvest some since I aim to have a dividend yield at 2-4x my expected expenses. The idea is to accrue so much wealth that I can take on the extra risk and let my portfolio keep growing faster than I can spend it.
Monthly or yearly movements of stocks are often erratic and not indicative of changes in intrinsic value. Over time, however, stock prices and intrinsic value almost invariably converge. ~ WB

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Re: Annuities-when and why?

Post by bayview » Mon Jul 20, 2015 10:35 pm

Sure, that's my ideal: have what we know we need in completely secure funds, and let the rest rock'n'roll.

Two things make that tricky for everyday investors: not that much $$$ to take care of the "secure funds", leaving something else for the fun money, and a general lack of understanding about how all this works.

We (DH and I) are working aggressively toward the LMP plus growth investments, but again, I don't know that many posters here truly grasp the realities of most people's investment options. Not everyone with inadequate savings is a feckless live-for-today person. Many people simply haven't got the income + the understanding + the discipline (and perhaps the ruthlessness) to put every spare penny into retirement accounts. A lot of folks have to deal with paying Aunt Edna's hospital bills and getting through that six-month layoff and making the child support payments. It isn't elegant, and who knows, maybe some foresight and self-discipline would have avoided a lot of this, but THIS is what many people deal with: trying to live on their paychecks, saving something for retirement, and taking care of (perceived) obligations along the way.

I don't mean to rant at you. :happy I do get irked at what feels like a lot of judgmental pronouncements here on BH. :beer
The continuous execution of a sound strategy gives you the benefit of the strategy. That's what it's all about. --Rick Ferri

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Re: Annuities-when and why?

Post by gordoni2 » Tue Jul 21, 2015 1:38 am

I recently made some calculations. I think SPIAs make sense for what would otherwise be a majority of the bond component of a retiree's portfolio provided the retiree is older than about age 45, reasonably healthy, and lacks a bequest motive (and also likely true even if they are not retired).

I'm implementing what I learned. 48, retired, and in the process of purchasing an inflation indexed SPIA from AIG. The SPIA I am purchasing has a Money's Worth Ratio of 99.9% (before state guarantee association taxes), meaning were my longevity and interest rate assumption correct, the margin for the insurance company would only be 0.1%. Of course the assumption aren't correct. In particular the insurance company is free to invest in higher yielding assets than inflation indexed TIPS, but in doing so it must take on risk for itself. Risk that I would be unwilling to bear in the bond portion of my own portfolio.

The cost of obtaining longevity insurance thus appears small.

I've made available a somewhat complex but precise calculator that can be used to compute the Money's Worth Ratio of a given SPIA quote at: https://www.aacalc.com/calculators/spia

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Re: Annuities-when and why?

Post by itstoomuch » Tue Jul 21, 2015 1:40 am

HomerJ wrote:...

Yes, I probably will do the same, although I'll probably buy a SPIA around 65-70. But I do like the idea of creating my own pension that covers basic needs for as long as I live... Fun stuff will come from the rest of my portfolio.


The deferred Annuities for us, are just a tool to achieve a certain future income with a known fee structure and risk transference. Another alternative for Income, is building a portfolio of dividend utilities. Current high quality utilities are yielding 3.5% -4.5%. Pretty good considering the Income isn't age dependent, tax advantaged in taxable accounts, and you get an equity component.

The problem for any strategy is that you either know the current return but not the future OR you chance today's investment and know the future.
gl :beer
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Re: Annuities-when and why?

Post by obgyn65 » Wed Jul 22, 2015 7:07 am

I bought a couple of deferred annuities in my late 40s starting age 62 and plan to use SPIAs at a later stage in my life, in my 70s. I found out that this approach will give more cash flow in the long term.
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Re: Annuities-when and why?

Post by skepticalobserver » Wed Jul 22, 2015 8:02 am

The typical commercially available SPIA should not been construed as a “bond component” of a portfolio. Unlike a bond there’s no return of a 100% of principal at maturity nor is an SPIA marginable. The payout percentage should not to be confused with yield and, in fact, the ROI is very poor unless the annuitant survives past the statistical death date. Until then the payout is mostly return of your own money and a teeny bit of interest. Insurance companies have a pretty fair idea when most annuitants are going to buy the farm. Are you feeling lucky?

An SPIA may be a proper fit for estate planning when used for the benefit of someone (a spouse?) who has no interest in or ability to manage money.

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Re: Annuities-when and why?

Post by Intrepyd » Wed Jul 22, 2015 10:06 am

In the accumulation phase, deferred variable annuities are an additional tax-advantaged, creditor-protected vehicle. The cost is substantial, converting all the earnings to ordinary income once you start drawing down.

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Re: Annuities-when and why?

Post by itstoomuch » Wed Jul 22, 2015 10:29 am

Intrepyd wrote:In the accumulation phase, deferred variable annuities are an additional tax-advantaged, creditor-protected vehicle. The cost is substantial, converting all the earnings to ordinary income once you start drawing down.


Please explain How this is so?
Suppose the Annuity is an IRA?
Rev90517; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax 25%. Early SS. FundRatio (FR) >1.1 67/70yo

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Re: Annuities-when and why?

Post by gwrvmd » Wed Jul 22, 2015 12:13 pm

itstoomuch: It doesn't matter if money in an IRA came from an annuity or not.
All money that is taken out of an IRA is Taxed at current income rates. It doesn't matter if the income came from an annuity or from stock gains or interest or capital gains or dividends or bond interest.
The theoretical "advantage" of an annuity is negated when the annuity is purchased in an IRA.....Gordon
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Re: Annuities-when and why?

Post by dbr » Wed Jul 22, 2015 4:30 pm

gwrvmd wrote:itstoomuch: It doesn't matter if money in an IRA came from an annuity or not.
All money that is taken out of an IRA is Taxed at current income rates. It doesn't matter if the income came from an annuity or from stock gains or interest or capital gains or dividends or bond interest.
The theoretical "advantage" of an annuity is negated when the annuity is purchased in an IRA.....Gordon


I haven't looked carefully at it, but the ability to pool longevity risk with an SPIA in an IRA might have a benefit. I gather that is not the kind of annuitization this thread has mentioned.

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Re: Annuities-when and why?

Post by rca1824 » Wed Jul 22, 2015 5:33 pm

skepticalobserver wrote:The typical commercially available SPIA should not been construed as a “bond component” of a portfolio. Unlike a bond there’s no return of a 100% of principal at maturity nor is an SPIA marginable. The payout percentage should not to be confused with yield and, in fact, the ROI is very poor unless the annuitant survives past the statistical death date. Until then the payout is mostly return of your own money and a teeny bit of interest. Insurance companies have a pretty fair idea when most annuitants are going to buy the farm. Are you feeling lucky?

An SPIA may be a proper fit for estate planning when used for the benefit of someone (a spouse?) who has no interest in or ability to manage money.


I don't think you're analyzing annuities the right way. The purpose of an annuity is not to maximize your expected ROI. Annuities give you the maximum sustainable guaranteed income stream. You cannot do better. Stocks are not guaranteed. Bonds, if trying to match the income of an annuity, run risk of depletion, hence, they're not sustainable. The purpose of annuity is insurance: to hedge against the risk of outliving your capital. Remember, a person's goal should be to max EU[C], not max E[R] (reads as: maximize expected utility of consumption, not maximize return on capital)

When I get ready to retire in 30 years, or if I get extra bored now, I will crunch some numbers and show you. Any portfolio with bonds should be outperformed by a portfolio with annuities. There may be a rebalancing bonus from holding some bonds, but that doesn't exclude the role of at least some annuities in your fixed income slice.
Monthly or yearly movements of stocks are often erratic and not indicative of changes in intrinsic value. Over time, however, stock prices and intrinsic value almost invariably converge. ~ WB

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susa
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Re: Annuities-when and why?

Post by susa » Wed Apr 06, 2016 6:26 am

Apologies for thread resurrection but this seemed like a good place for follow up.

Is there a tax reduction or tax strategy that should be considered for depleting 401k funds and use of a SPIA Annuity ?

For a sample pseudo calculation and assumption:

Suppose I do not care about income growth but want to withdraw 1M from a tax deferred 401k account.
I estimate that at least 20% will be paid in taxes, thus I may only get 800k to spend on myself.
Is there a SPIA that could be used to reduce the tax impact ?

We have 5 or 6 years until SS at FRA and as I understand it, I could simply take out 50k from 401k and after doing MFJ Income tax return using standard deductions, the tax bite would be less than 20%, plus I could just delay SS another 4 years. So is there a SPIA that would make more sense, especially if I don't need more than 40-50k per year for expenses ?

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Re: Annuities-when and why?

Post by Cyclesafe » Wed Apr 06, 2016 11:58 am

I am having a little trouble understanding your question.

A SPIA coming out of a tax deferred account will incur full income tax to the extent the account is comprised of pre-tax contributions. If, for example, the account is worth $1000k, and $100k of contributions were in after-tax dollars, then (assuming a 4% 10-year certain annuity: $120.72/yr per $1k - trust me on this)...

$100k/($120.72/year x (1- state premium tax, if any) x 1000 x 10 years) of your annual payment would be free of tax.

Again, if your 401k was entirely funded with pre-tax dollars, 100% of the SPIA payment would be taxable.

An advantage of an SPIA in this situation is that you will have some (taxable) return - 4% in my example - rather than trying to find a relatively certain 4% elsewhere.

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Re: Annuities-when and why?

Post by mmcmonster » Wed Apr 06, 2016 1:38 pm

HomerJ wrote:
I intend to buy a CPI-adjusted SPIA between age 75 and 80, and then receive two inflation-adjusted monthly checks (Social Security and SPIA) for as long as I live. They will cover living expenses, but no luxuries. My stock/bond portfolio will pay for toys, treats, and trips, and if the market tanks, I'll just do without.


Yes, I probably will do the same, although I'll probably buy a SPIA around 65-70. But I do like the idea of creating my own pension that covers basic needs for as long as I live... Fun stuff will come from the rest of my portfolio.


I'm not a fan of the SPIA evaporating in smoke if I die a week after signing on the dotted line. Would rather my hard earned $$$ go to the kids and grandkids.

I think that when it gets time for me to retire, I'll just convert my portfolio to 20/80 and live off the monthly returns on the bonds.

Bonds don't pay much ... except if you own a lot of them. :D

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Re: Annuities-when and why?

Post by tc101 » Wed Oct 04, 2017 10:46 am

I am 67 and retired. I am living off my investments at Vanguard and a temporary return from a real estate investment that will end in a few years. I will start SS when I am 70. I want income from an SPIA starting about age 75. I will invest at least $250K in an SPIA. $250K is what is guaranteed by my state, Georgia.

Questions:

Is it better to buy the annuity now with a lump sum deferred, or wait until I am 75?

Is there a way to get more than the $250K Georgia guarantee? Are these annuities so safe that the state guarantee doesn't matter?

Where is the best place to buy?
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ResearchMed
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Re: Annuities-when and why?

Post by ResearchMed » Wed Oct 04, 2017 10:51 am

tc101 wrote:
Wed Oct 04, 2017 10:46 am
I am 67 and retired. I am living off my investments at Vanguard and a temporary return from a real estate investment that will end in a few years. I will start SS when I am 70. I want income from an SPIA starting about age 75. I will invest at least $250K in an SPIA. $250K is what is guaranteed by my state, Georgia.

Questions:

Is it better to buy the annuity now with a lump sum deferred, or wait until I am 75?

Is there a way to get more than the $250K Georgia guarantee? Are these annuities so safe that the state guarantee doesn't matter?

Where is the best place to buy?
Take a look at www.immediateannuities.com for a quick comparison of pricing, given your age, and "start now" or "in x years", just to get a preliminary feel.

My understanding (and this may vary by state) is that the state limit for the association "guarantee" (note: It isn't a "real" guarantee, but supposedly would be made "good" - or mostly good - by other annuity providers) is per person per annuity provider.
So while you can't just but 2 x $250k SPIA's from one provider, you can get one each from two different providers.
But please double check how this works in *your* state.

RM
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bengal22
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Re: Annuities-when and why?

Post by bengal22 » Wed Oct 04, 2017 11:04 am

I have a pension, my wife's SSA, and some day my SSA. That's enough annuities for me. I think I can get a better return through investing than with annuities.

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